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Policy Authority
Category: Board and Leadership

Duty of Good Faith

Also known as: Good Faith, Implied Covenant of Good Faith and Fair Dealing
Simply put

The duty of good faith is the expectation that people act honestly and fairly, without trying to take unfair advantage of others. In a corporate governance setting, it means directors and officers making decisions on behalf of a company should do so with honest intent and faithful purpose. The same broad principle also appears in contract law, where parties are generally expected to deal honestly with one another.

Formal definition

The duty of good faith is a fiduciary principle requiring directors and officers, when acting in their capacities as corporate fiduciaries, to make decisions with honesty of purpose and faithful attention to the interests they serve. More broadly, good faith encompasses honest dealing and, depending on context, may require an honest belief or purpose and the absence of intent to take unfair advantage of another party. In contract law, this principle is typically expressed as an implied covenant of good faith and fair dealing that courts commonly treat as inherent in written agreements. The precise content and enforceability of the duty vary by jurisdiction and by whether it arises in a fiduciary, contractual, or statutory context; this entry does not address specific jurisdictional standards, remedies, or the interaction between good faith and other fiduciary duties.

Why it matters

The duty of good faith sits at the heart of how organizations hold their leadership accountable. When directors and officers make decisions as corporate fiduciaries, the expectation that they act with honesty of purpose and faithful attention to the interests they serve provides a baseline against which conduct can be evaluated. Without this principle, governance structures would lack a normative anchor for assessing whether decision-makers were pursuing legitimate corporate ends or acting for improper motives.

The principle also extends beyond the boardroom into contractual relationships. In many jurisdictions, courts treat an implied covenant of good faith and fair dealing as inherent in written agreements, meaning parties are generally expected to deal honestly with one another even where the contract text is silent on a particular point. This matters for compliance and legal functions because obligations may be read into agreements that go beyond the literal terms, affecting how contracts are drafted, performed, and enforced.

Because the precise content and enforceability of the duty vary by jurisdiction and by whether it arises in a fiduciary, contractual, or statutory context, organizations should be cautious about treating good faith as a single uniform standard. What constitutes honest dealing, and the consequences of falling short, can differ materially across legal settings. Understanding the applicable context is therefore essential before relying on the duty as a governance or contractual safeguard.

Who it's relevant to

Directors and Officers
Those making decisions as corporate fiduciaries are directly subject to the duty of good faith, which expects them to act with honest intent and faithful purpose on behalf of the company. Understanding the principle helps them frame decisions in a way that reflects honesty of purpose rather than improper motive.
Governance Professionals and Corporate Secretaries
Those supporting board and officer decision-making benefit from understanding good faith as a fiduciary principle, since it informs how deliberations, records, and decision rationales may be assessed. The precise standard varies by jurisdiction, so applicable context should be confirmed.
Legal and Contracting Teams
Because courts in many jurisdictions may read an implied covenant of good faith and fair dealing into written agreements, drafting and negotiating teams should recognize that honest dealing obligations can extend beyond the literal terms of a contract. This entry does not provide legal advice or jurisdiction-specific drafting guidance.
Compliance Officers
Good faith informs expectations of honest and fair dealing that underpin many internal policies and codes of conduct. It offers a normative reference point for evaluating whether conduct reflects honest intent, though the enforceable content depends on the fiduciary, contractual, or statutory setting.

Inside Duty of Good Faith

Duty of Loyalty Component
The expectation that directors, officers, and fiduciaries act in the interests of the organization and its stakeholders rather than pursuing personal or conflicting interests. In many corporate governance regimes, good faith is treated as closely related to, or a component of, the broader duty of loyalty.
Honesty and Absence of Bad Faith
A requirement to act honestly and without an intent to harm the organization or to knowingly disregard responsibilities. Good faith is commonly framed in the negative, as the absence of bad faith conduct such as intentional wrongdoing or conscious disregard of known duties.
Informed Decision-Making
The expectation that those owing the duty inform themselves reasonably before acting or deciding. This element overlaps with the duty of care but is distinct; good faith concerns the honesty and intent behind the process rather than the objective adequacy of diligence.
Oversight and Good-Faith Attention
In many governance contexts, good faith includes making a genuine effort to establish and monitor systems of oversight, information reporting, and compliance. A sustained or conscious failure to attempt oversight may be characterized as a lack of good faith, though the precise standard varies by jurisdiction.
Contractual Good Faith and Fair Dealing
In many contract-law contexts, an implied obligation that parties not act to undermine the other party's ability to receive the benefits of the agreement. The scope and recognition of this implied covenant vary significantly across jurisdictions.

Common questions

Answers to the questions practitioners most commonly ask about Duty of Good Faith.

Does the duty of good faith mean directors must always achieve the best possible outcome for the organization?
No. The duty of good faith concerns the honesty and sincerity of a director's or fiduciary's conduct and intent, not the quality of outcomes. Acting in good faith typically means acting honestly, without a conflicting personal interest, and with a genuine belief that one is serving the organization's interests. A decision made in good faith may still turn out poorly; conversely, a favorable result does not by itself establish good faith. The duty addresses the state of mind and integrity of the actor rather than guaranteeing results.
Is the duty of good faith the same as the duty of care?
They are related but distinct. The duty of care commonly concerns the diligence, attention, and reasonable process a fiduciary brings to decisions, while the duty of good faith concerns honesty of purpose and the absence of conflicting or improper motives. In many legal frameworks the two are treated as separate components of fiduciary responsibility, and a breach may be analyzed differently depending on which duty is implicated. The defining difference is that care focuses on how carefully one acts, whereas good faith focuses on the sincerity and honesty of the intent behind acting. The precise relationship and consequences vary by jurisdiction.
How can a board demonstrate that decisions were made in good faith?
Boards commonly evidence good faith through documentation of their deliberations, such as minutes reflecting the information considered, the questions raised, and the rationale for decisions. Disclosure and management of conflicts of interest, reliance on appropriate expertise, and a record of honest engagement with the matter can support a good-faith characterization. Documentation practices supporting good faith are a governance concern; they do not constitute legal advice, and what is sufficient depends on jurisdiction, entity type, and the nature of the decision.
What role does conflict of interest management play in supporting the duty of good faith?
Because good faith typically requires acting without improper personal motive, identifying and managing conflicts of interest is closely connected to it. Common practices include maintaining a conflicts register, requiring disclosure of relevant interests, and recusal from decisions where a material conflict exists. These are governance mechanisms that help demonstrate that a fiduciary acted for the organization's interests rather than a competing personal interest. The existence of a conflict does not automatically establish bad faith, but unmanaged conflicts may call good faith into question.
How should officers document reliance on advisers or management reports when acting in good faith?
When relying on information from officers, employees, or external advisers, fiduciaries commonly record what was relied upon, its source, and why reliance was considered reasonable. In many frameworks, good-faith reliance on competent and appropriately qualified sources supports a fiduciary's position, provided there is no reason to believe the information is unreliable. Documentation may note the expertise of the source and any due diligence performed. The extent to which such reliance is protected varies by jurisdiction and should be confirmed against applicable law.
How does the duty of good faith interact with an organization's compliance and internal control environment?
A functioning compliance and internal control environment can support fiduciaries in fulfilling the duty of good faith by providing the information, escalation channels, and oversight structures needed to act honestly and on an informed basis. Some governance interpretations associate a sustained, conscious failure to establish or monitor oversight systems with a failure to act in good faith, though the specifics depend on jurisdiction and case context. This entry does not address the design of specific control frameworks or provide legal conclusions on when such failures occur.

Common misconceptions

Duty of good faith is the same as the duty of care.
These are distinct, though related. Good faith typically concerns honesty of intent and the absence of bad-faith conduct, whereas the duty of care concerns the diligence and prudence exercised in a decision. A decision can be made in good faith yet still fall short of a care standard, and the two are often analyzed separately in governance and legal contexts.
Acting in good faith guarantees protection from liability or regulatory consequence.
Good faith may be relevant to how conduct is evaluated, and in some regimes it factors into protections such as business-judgment considerations, but it does not universally shield individuals or organizations. Its effect depends on jurisdiction, the specific obligation at issue, and the facts. It should not be treated as a guaranteed defense.
Duty of good faith has a single, universal definition.
The content and enforceability of good-faith obligations vary by jurisdiction, by area of law (for example corporate fiduciary duties versus contractual dealings), and by sector. Practitioners should not assume that a formulation from one legal system or context applies elsewhere.

Best practices

Identify which specific obligation is in scope, distinguishing fiduciary good faith owed by directors and officers from any implied contractual covenant of good faith and fair dealing, and confirm the applicable jurisdiction and legal context before relying on a definition.
Document decision-making processes, including the information considered and the rationale, to evidence honest and informed conduct rather than relying on the assumption that good faith will be inferred.
Establish and monitor oversight, reporting, and compliance systems, and maintain records demonstrating genuine efforts to attend to known responsibilities.
Manage conflicts of interest through disclosure and recusal procedures so that loyalty-related aspects of good faith are supported by verifiable governance practices.
Avoid treating good faith as a standalone liability shield; obtain qualified legal advice on how it interacts with duties of care, statutory obligations, and any available protections in the relevant jurisdiction.
Keep governance, risk, and compliance functions aligned so that assurance activities independently evaluate whether oversight and good-faith obligations are being met, without confusing that assurance role with management's own responsibility to act in good faith.
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